Tuesday, February 25, 2014

We like to trend when trading Forex | a story of three trades in Cable (GBPUSD)

The hourly chart above shows a short trade, where we sold Sterling against the US
dollar (GBPUSD). This is exactly the kind of trending trade we like to enter.
It can be seen that the blue line, which is a short period Exponential Moving
Average (EMA, 8 period) never crossed over the thicker line, which is a longer
period EMA (50 period). We took off half
the position when it looked like the trade might be running out of steam and
then closed it out completely later. This trade ran from Jan 30th to
Feb 5th last.

The next trade in the same instrument was entered a few days later, on
Feb. 11th, as a long trade. Again, a very successful trade,
providing great satisfaction because it was in the opposite direction to the
one we had closed out just a few days earlier. We took off half again, as a
precaution, in the form of a hedge (a counter trade with half the position
size), on Feb 12th but this did not last long as we perceived the
main trade to be very healthy. It was finally closed out on Feb 17th
when the pair started to look “toppy” and, once again, it can be seen that the
shorter period EMA kept well away from the longer period EMA for the duration.

Our third trade in cable was entered on the same day, as a short. It was
actually a hedge for the previous trade, which meant that in our strategy it
had half the position size of the previous one and pre-dated that trade’s
closure. This is its story:

This trade was also successful, but with a lot less satisfaction than
the previous two. We took off half of the position on Feb 19th and
found it necessary to close it out completely on Feb 20th. This is
because it became apparent that the market was effectively going sideways. It
can be seen that the short period EMA is now crossing the longer period EMA
persistently.

It is difficult to make money in these conditions, so we have been out
of the market. The price bar at the far right hand side of the chart shows the
position towards the close of the London
session yesterday, Feb 25th.

All the other instruments we watch are suffering from the same issue, a
lack of direction. Frustrating as it is, it also demonstrates the truth of the
adage that you can only take out of the market what it will give you at any
particular time. Foreign Exchange trading requires the trader to sit back,
while still being awake for a change in circumstances, and take the long view when these situations arise.

The charts above contain the same instrument, the same time period, the
same value EMAs, the same scale, and cover the period from Jan 30th
to Feb 20th.